Demonetisation losses & gains: All you want to know in brief

Company bosses who get the sack react in different ways: some quietly leave, others graciously wish their successor luck, most try to nurse hurt pride as best they can.

Allies say that after four years in the job, Mistry had got to grips with the inner workings of the company.

Company bosses who get the sack react in different ways: some quietly leave, others graciously wish their successor luck, most try to nurse hurt pride as best they can. Not Cyrus Mistry, who on October 24, was ousted as chairman of the Tata Group, India’s biggest conglomerate. Bemused and angered at having his predecessor, Ratan Tata, suddenly seize back control, he has refused to go. The schism at the heart of Tata has drawn attention to what made it possible in the first place: an overly complex structure trying to oversee too many businesses, deficient corporate governance and a penchant for opacity. Whether these problems are addressed, and how, will shape the group and its reputation for decades to come.

Tata’s reasons for sacking Mistry are unclear. He is from a family that has had a nearly 20% shareholding in the group for decades (most of the other shares are controlled by charities that are chaired by Ratan Tata). Allies say that after four years in the job, Mistry had got to grips with the inner workings of the company. He was ready to start changing it.

His critics, on the other hand, never believed that any executive could hope to turn around a conglomerate that has multiple misfiring subsidiaries in industries ranging from fertilisers to luxury hotels, cars and power generation. Mistry had a team that many considered unimpressive. Few who know Tata were surprised that he made only plodding progress.

Yet not even the firm itself seems to know exactly why it dumped him when it did. It has accused him of paying too little heed to Tata’s reputation for doing business in a socially responsible fashion, but also of doing too little to change things to boost profits. He also stands charged with being overly controlling; yet Tata Group has briefed that he gave its subsidiaries too much freedom. Most Tata companies are independent, listed firms in which Tata has only a 25-30% shareholding. All of these allegations of various kinds of incompetence on the part of Mistry sit awkwardly with glowing performance reviews accepted by Tata Group’s board in June, according to minutes seen by The Economist.

All sides now at least seem to agree about how the group is performing. Two businesses, JaguarLand Rover (JLR), a maker of high-end cars, and Tata Consultancy Services (TCS), an IT services company, are generating enough profits and dividends to keep the group buoyant. But at least five businesses—steel, Tata’s Indian-made cars and trucks, power generation, an upscale hotel group and a smallish mobile-telephony arm—either lose money or soak up capital without producing good returns.

Mistry has a point when he says he inherited the problems from his expansion-minded predecessor. And some progress came on his watch. He sold part of the British steel business (to Tata old-timers’ deep chagrin, apparently, despite its steep losses). The telecoms operation was overhauled, ready for some form of industry consolidation, new bosses were brought in and so on. But he shied away from a radical redrawing of the boundaries of a sprawling group. Still, it is plausible that Tata and his allies would in any case have stopped him. Tata is now only an interim boss—he has promised to find a successor to take over the chairmanship of the holding company by the end of February—but he will continue to wield sway from atop the charities that control it.

Regardless of the true reasons for his ousting, Mistry has befuddled his adversaries. They had expected him to depart in “the Tata way”: quietly and without fuss. He had not granted a single interview to the media during his time as chairman. Instead he wrote to the board alleging several instances of improper conduct around accounting and other matters. Three weeks on, none of the substantive charges Mistry laid out has been conclusively addressed. The securities regulator is reportedly taking an interest. Even though not formally announced, it is a humiliation for the company and for the business grandees on its various boards.

Broad failures of corporate governance emerge from Mistry’s claims. Tata, who has no children and was the first Tata to have a non-family member succeed him, appears to have found a way to get more and more important decisions sent to the board. Here, his allies apparently agreed to do his bidding, including Mistry’s sacking. A cheap-car project that Tata had launched, for example, would have been ended had it not been for his intervention, and it continued making losses. Most seriously, Mistry has suggested that the company has avoided taking write-downs required by accounting rules, of a whopping $18 billion, notably in the steel business. The firms involved say that their numbers are correct.

Mistry is trying to stay on as chairman of the operating companies even after his removal from the group. The boards of some of the large subsidiaries, such as Tata Motors (owner of JLR) and the hotels division, have defied Tata and given their support to Mistry. The parent firm did manage to evict him from TCS’s board, because it owns a majority of it, unlike most of its other big group companies.

The accidental activist

Some people would welcome his continued presence. “He’s like an activist shareholder in a group that badly needs it, good luck to him,” says a senior Mumbai banker. But he may not be able to hang on for much longer than a few weeks. Even if the various companies’ directors have so far let him stay on as chairman, Tata can use its stakes in the firms, with the help of its allies, to boot him off boards entirely. There are plans to do just that in a series of extraordinary general meetings.

And Tata has plenty of levers to get its way. It could strip the subsidiaries of the right to use its valuable brand—it has done this at least once in the past. Although the group is loth to admit it, the central holding company implicitly guarantees the debts of the operating entities that are listed. The troubled ones, such as the telecoms or power-generation units, would pay far more to borrow without its support. In one of its letters, Tata alludes none too subtly to the extra creditworthiness it gives. But kicking out subsidiaries in a sort of break up would please no one but Tata’s rivals.

A compromise is possible. Some businesspeople in Mumbai reckon that the government will not stand by idly for much longer, and that it could force a truce. Mistry won’t get his job back, but the group might agree to ease out Tata not only from the chairmanship of the holding company but also from his position on top of the charities through which he appears to control Tata Group.

No less may be necessary to attract a successor to the top job. Few in Mumbai expect that Tata will bring in an outsider to grapple with its problems. Many reckon that Natarajan Chandrasekaran, who is thought to have done well running TCS since 2009, is a likely candidate. Then Tata will have to decide how to treat his successor. The experience of Mistry’s last weeks, during which the mild-mannered Indian executive turned into something like an American-style corporate raider, might just be enough to persuade him to let the new chairman lead.